Ben Aris in Moscow -

Jeff Galmond gives bne his side of the story about the dirty fight for control of the Russian mobile operator Megafon.

If you throw enough mud, then some of it will stick. But in Alfa Group’s long running battle with Jeff Galmond for control over a 25.1% stake in Russia’s third largest mobile phone company Megafon, the tactic is proving even more effective because some of the allegations they make against Galmond are probably true.

The Russian financial-industrial holding Alfa Group has accused Galmond of fronting for the Russian minister for telecommunications, Leonid Reiman, who they claim is the real beneficial owner of Megafon, and that Galmond's company IPOC International Growth Fund is nothing more than a money laundering operation. Several private investigation firms such as Kroll have been busily digging up dirt on Reiman and IPOC using tactics that might have come straight out of an Ian Fleming novel. And while they have scored a few hits in the media, none of the claims have yet been proven in court.

But the hoopla surrounding the allegations of money laundering and abuse of office aimed at Reiman have swamped another story - the story of how Megafon was created and how that convoluted and complex process led to the current dispute between the two sides.

At the heart of this story is a row over two option agreements signed in 2001 by Galmond's co-founder in Megafon, the Russian-American businessman Leonid Rozhetskin. Those options covered the transfer of Rozhetskin's 25.1% stake in Megafon to IPOC. Rozhetskin doesn't deny he signed the two option agreements, but claims they are void because Reiman personally threatened his life unless he signed over his shares.

As such, Rozhetskin claims he was entitled to sell the Megafon stake to Alfa Group, which he did in the summer of 2003.

“On several occasions during 2001 and thereafter, I was approached by the Russian Minister of Telecommunications Leonid D. Reiman who repeatedly threatened me in an effort to extort from the company a majority stake in ZAO “Sonic Duo”, Rozhetskin testified to the Swiss International Chamber of Commerce (ICC) arbitration court in 2003. Sonic Duo was a precursor company to Megafon that originally held the mobile operator license.

So far the ICC has only ruled on the second option agreement, but said that Rozhetskin failed to substantiate the accusation of duress. However, the case concerning the first option agreement is still running.

And it could be that the dispute over the option agreements is entering the final furlough.

At the start of May, the legal wrangling moved onto Russian soil for the first time with a victory for IPOC.

Rozhetskin left Russia in June 2005 after the general prosecutor re-opened a criminal case against Rozhetskin and his two partners into the sale to Alfa Group. bne tracked Rozhetskin down to Los Angeles where he is now incommunicado, but he didn’t respond to attempts to contact him.

An investigation into the sale of the stake to Alfa Group was originally opened in December 2004, but in May 2005 the Moscow prosecutor closed the case after finding no grounds for prosecution. However, 10 days later, investigators changed their minds and reopened the case, saying in an official document that “a check showed that the case was closed prematurely, without checking all of the circumstances,” according to the Russian daily Vedomosti.

And in the most recent development, the Leningrad region Arbitration Court ordered Alfa Group to not sell or deal with the disputed Megafon stake at the end of April before the case is heard on June 19, after IPOC appealed to the court under the terms of the Russian Law on Foreign Investments.

“This is a real setback for Alfa. The spotlight once again will be focused on Alfa and its dubious and unlawful approach to legally binding agreements,” an IPOC spokesman crowed.

“We have said from the outset of our legal actions against Alfa, we believe the integrity of contracts with Russian companies is at stake.”

EMPIRE BUILDING OVER COFFEE

To find out how the two sides have found themselves at loggerheads, rewind to an icy January morning in 2001. Megafon was born in the café of the National Hotel at the bottom of Tverskaya, Moscow's main drag. Galmond and Rozhetskin met over coffee in the warmth of this imposing tsarist era hotel used by Lenin as a bedroom shortly after the October Revolution.

The talk was of joining forces: Rozhetskin had a Moscow mobile phone licence in the shape of Sonic Duo but no money; Galmond had access to money but needed a licence.

It remains unclear how Sonic Duo got its license in the first place, but by the start of 2001 the company was a joint venture between Rozhetskin's LV Finance and Central Telegraf-Mobile (CT-Mobile) on one side with a 65% stake, and the Finnish telecoms operator Sonera with 35% on the other.

Rozhetskin was already well known in Moscow. A Harvard-educated lawyer, he sprang to prominence as head of investment banking at Renaissance Capital when it was founded in 1995 by Boris Jordan and Stephen Jennings.

Renaissance Capital profited from close relations with the oligarch Vladimir Potanin and Rozhetskin was still working with Potanin in 2005 as a board member of Norilsk Nickel responsible for investment issues until Potanin abruptly sacked him once the general prosecutor started his investigations.

Rozhetskin may have been a big shot, but he had not been able to translate his connections into cash. He was casting around to raise enough pre-financing to get Sonic Duo off the ground before going to the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC) to get the project financing needed to build a proper network.

That's where Galmond came in. At the start of 2001, Galmond was already a major stakeholder in Northwest Telecom, the biggest mobile phone operator in the northern capital of St Petersburg through the holding company Telecominvest (TCI), which was founded by Reiman. Galmond denies Reiman was the real force behind TCI.

“Reiman was never a shareholder in TCI, this is another myth. Reiman was one of the commerical driectors of TCI, which was a vehicle set up to attract investment into the St Petersburg telecoms business,” says Galmond.

Together with Swedish partner Telia, Galmond was casting about for a chance to expand his mobile business to create a national mobile phone operator.

“During 2000, we were discussing what our different plans would be in terms of developing the [European mobile standard] GSM 900,” says Galmond. “At one of the strategic sessions with Telia, we discussed if it would be possible to create a pan-Russian network that would cover the whole country.

The question was, should we apply for licenses or do it by way of acquisition? Obviously by acquisition we would have to have rather deep pockets, but applying for licenses would take a long time.”

Just after Christmas of 2000, the managing director of TCI returned to St Petersburg to say he had found a possible acquisition target - a small firm called Sonic Duo that had the necessary telecoms license but had been unable to find the pre-financing to get its show on the road. Galmond was intrigued.

“We checked him out,” says Galmond. “He was incredibly well connected in Moscow. He had been an advisor to [US financier George] Soros - he was a big shot kind of guy.”

The two of them got on well at their first meeting at the National Hotel and agreed to go into business. Rozhetskin was to write the business plan and lacking the ability to fund his equity contribution to the venture, he was willing to put up part of his share in Sonic Duo in exchange for the pre-financing from IPOC.

At the root of many of the subsequent problems lies both sides' willingness to engage in what could be called “Matrioshka business” - hiding the owner's real identity with a stack of shell companies within shell companies. And in the IPOC versus Alfa Group story, the number of Matrioshka companies multiplies at each twist of the tale.

Sonic Duo owned the actual mobile license, but Rozhetskin controlled this company through another called CT-Mobile - the firm eventually bought by Alfa Group.

However, the crucial option agreements between Galmond and Rozhetskin concerned the ownership of the Bahamas-registered Transcontinental Mobile Investment Limited, which in turned owned 100% of CTMobile.

Galmond's own IPOC has a similarly Byzantine structure.

At their second meeting the two men discussed terms: Rozhetskin wanted the money in exchange for a convertible bond, while Galmond wanted equity from the start. They decided to compromise with the first option agreement, where Rozhetskin's LV Finance agreed to sell its 77.7% stake in Transcontinental Mobile - equivalent to a 50.5% stake in Sonic Duo - to IPOC in return for $15.15 million.

“The option agreement meant that we could transfer the money straight away and we would be guaranteed equity once we exercised the option,” says Galmond. “Rozhetskin could be sure that we would not get the equity unless we could put up the kind of financing that the company would need.”

The first stage of the deal was done. On April 10, 2001, Rozhetskin signed the first option agreement and IPOC paid $5 million into an escrow account held by the Swiss law firm von Meiss, Blum & Partners.

FREQUENCY FIGHT

Megafon appeared as a legal entity in August 2001 at the start of a merger between Galmond's Northwest Telecom and Sonic Duo that took another nine months to complete.

However, the agreement also brought together three rival Scandinavian telecoms groups and the first order of business was to separate out the conflicting interests.

Sweden's Telia was partnered with Galmond in TCI and had no problem with coming into the new company with the Finnish group Sonera (the two companies later merged in March 2002), which was partnered with LV Finance in Sonic Duo.

However, Galmond was also partnered with the Norwegian firm Telenor in Northwest Telecom that was going to be a key part of the young Megafon and Telenor was also a big shareholder in VimpelCom - Russia's second biggest mobile phone company and partly owned by Alfa Group.

“Both the Finns and Swedes gave me a power of attorney to negotiate on their behalf to get the Norwegians out of Northwest prior to our merger with LV Finance,” says Galmond, who did the deal and then started the process of forging Megafon out of all these assets.

The merger agreement with all the partners went smoothly, but the company almost immediately hit a financial rock that nearly sunk the enterprise before it got going.

“The biggest problem was that the business plan that Rozhetskin had created for the EBRD/IFC financing was overly optimistic. He had overdone this part of the job. By October [2001], it was clear that we were not going to have a big launch of the network at the year-end. One of the main reasons was we didn't have frequencies; we couldn't sell anything!” said Galmond.

The frequency problem was miraculously solved when the telecoms ministry confiscated frequency from Megafon's rivals in July 2001 and allocated it to the start-up, sparking what came to be known in Russia as the “frequency scandal” and fuelling suspicions that telecoms minister Reiman was connected to Megafon. Galmond claims Reiman didn't order the confiscation, but was carried out by one of his deputies.

Eventually, the frequencies were returned to the original holders and other capacity was found. Megafon got off to a quiet start in December 2001 by selling its first phone to a 15-year-old boy that walked in off the street.

SECOND OPTION

By the middle of 2001, business wasn't going so well and the Scandinavian shareholders were starting to get nervous. Missing the business-plan target and the lack frequency at the outset meant no project financing from the EBRD or IFC. Worse, the company was also not meeting the license requirements and so was in danger of losing that as well.

Telia called a board meeting in November 2001 and sent in their lawyers to tell the others that they had had enough and were pulling out. Galmond believes Telia was betting on the fact that Megafon would fold and they would be able to step back in and pick up the licenses for a song.

To add to the problems, a row broke out been Galmond and Rozhetskin, who, it transpired, had not paid in the first instalment under the equity agreement to proportionally match IPOC's $5 million.

“He didn't have the money. Instead we found out that they had been paying LV Finance management fees out of Sonic Duo for the administration of the project. Instead of putting money into the company, he had been taking it out, to the tune of one million bucks,” claims Galmond.

A crisis was brewing so Galmond decided to buy Rozhetskin out. On December 14, 2001 Rozhetskin committed his remaining 22.3% of shares in Transcontinental Mobile (equivalent to the rest of his holdings in Sonic Duo) to Galmond in a second option agreement.

“The first option agreement was structured so the money was there to fund Sonic Duo and to pay in the money necessary to obtain the EBRD project financing,” says Galmond. “The payments of the second option agreement were supposed to go directly to Rozhetskin and his partners.”

IPOC immediately paid Rozhetskin $10 million and he received another $16 million as a promissory note that came due on September 1, 2003, according to Galmond.

This second option agreement gave IPOC an option for all of LV Finance's holding in Transcontinental Mobile, which by this time was equivalent to a 25.1% share of Megafon.

ENTER ALFA

With IPOC and the two Scandinavian companies in charge, things began to move a lot quicker. By March 2002, the business plan had been amended and new covenants were agreed with the EBRD and IFC. The first instalments of the project financing money arrived and the merger of the partners' assets was completed. By the end of the year, things were starting to look decidedly rosy. Megafon was making headway and growing fast.

Galmond had gone home to Denmark for the holidays and was preparing for the festivities when he got a call from Rozhetskin on Christmas Eve.

“I am coming to Copenhagen on my way to the States - can you meet me at the airport?”

asked an anxious Rozhetskin, according to Galmond.

“Is it very urgent?” asked Galmond.

“Yes I have to talk to you,” Rozhetskin replied.

So Galmond drove out to the airport and met Rozhetskin in a café. Galmond says Rozhetskin quickly came to the point: he was fishing for a way to keep LV Finance as a participant in Megafon, says Galmond. But the clock was ticking because once the promissory note came due in nine months time, Rozhetskin's stake in Megafon would revert to IPOC and LV Finance would be out of the game.

Galmond claims that Rozhetskin tried to persuade him to create a capital call in TCI and dilute the stakes of Northwest Telecom in LV Finances' favour to create a 5% stake in TCI as compensation for his efforts in creating Megafon. In effect Rozhetskin was asking Galmond to give him a piece of Megafon for free as reward for being a founder.

“Why should I do that?” asked Galmond. “What is the problem? We had an agreement; you signed it. All I owe you is the $16 million under the promissory note and that is not due before September.”

Under the two option agreements, Rozhetskin would make a total of $26 million, of which he had already received $10 million. However, the 25.1% stake in Megafon was already clearly worth a lot more than this. In the court documents, Galmond claims Rozhetskin also tried to “squeeze” IPOC for $60-$70 million in order to allow the transfer of the 25.1% stake in Megafon to IPOC, a charge that Rozhetskin has formally denied.

Galmond rebuffed both suggestions and returned home to his children. The ICC court documents support Galmond's claim that immediately after this meeting Rozhetskin cut LV Finance's 25.1% in Megafon in half and sold 49% to three Panamanian companies called LVF 1, 2 and 3, in violation of the option agreement.

The partnership was beginning to break apart and Galmond was first aware of trouble at the June board meeting when the shareholders were supposed to sign off on a loanfor- equity conversion after each of the partners had lent the company money in proportion to their equity stakes - except as IPOC was about to take over the LV Finance stake, it paid this share in addition to its own.

The representative from Sonera, the Finnish telecoms group originally allied with Rozhetskin, objected when Galmond tried to claim both equity contributions in return for the loans “IPOC can't take up the loans as equity in the company, as it is only eligible for the shareholders as they are registered today,” he said.

Rozhetskin took Galmond out into the corridor and persuaded him that nothing was wrong and that if he paid the money in via LV Finance, everything would be okay, says Galmond, who was by then starting to get suspicious and decided to settle accounts.

On June 28, 2002, IPOC sent the remaining $16 million that IPOC still owed Rozhetskin for the LV Finance shares to the Swiss lawyers von Meiss, Blum & Partner - three months early. The next day he got a call from those lawyers saying the contract had been terminated and the check was being returned.

Galmond was in London at the time and called his lawyers there for advice. They told him to send the cheque again as the Swiss lawyers couldn't terminate an escrow contract unless both parties to the account agreed. Von Meiss, Blum & Partner sent the cheque back again, saying that someone had bought LV Finance. Galmond was now seriously worried.

The court documents show that in March 2003 Rozhetskin had sent notification to IPOC to block any transferral of shares in Megafon held within Transcontinental Mobile, claiming that the “full option price” had not been paid by IPOC. Then on July 21, his holdings in Transcontinental Mobile were transferred to another six shell companies and the shares of a now worthless Transcontinental Mobile held in the escrow account with the Swiss law firm were cancelled.

While Galmond was in London, Rozhetskin called his office in Moscow asking to meet on August 5 - the day after Rozhetskin's birthday.

The partnership ended as it had begun, in a hotel, but this time the Marriot Grand on Moscow's Tverskaya and a short walk from the National Hotel at the bottom of the road.

Rozhetskin walked into the lobby with a grin on his face, recalls Galmond.

“I sold it all,” Rozhetskin announced as he sat down.

“You sold what?” asked Galmond with a sinking feeling in his stomach.

“I sold it to Alfa,” replied Rozhetskin.

“You sold what to Alfa?” asked Galmond.

“I sold LV Finance to Alfa: they promised to protect me financially,” Rozhetskin answered.

“Well that is okay, as long as they respect our option agreement. I sent you a cheque but it was sent back. Can you tell me what is going on?” asked Galmond.

“Well, sometimes business people have to sort things out in court,” said Rozhetskin.

THE EURASIA PROJECT

Rozhetskin's account of these events, according to his defence in the ICC arbitration, is very different. He admits signing the two agreements and drawing up the business plan, but says he did so in fear of his life. His main point is that as the agreements were made under duress, they were void, and so he was free to dispose of the Megafon stake as he saw fit.

(You can read all the court documents and supporting materials are on bne's website bne.uk.com) Mikhail Fridman, the billionaire owner of Alfa Group, was the obvious buyer.

Fridman has big ambitions for Alfa Group's telecoms assets, which are organised in a holding company called Altimo. From the outset, Alfa Group has made it clear it wants to merge Megafon with VimpelCom in the first stage of building a pan-Eastern European mobile phone operator - a “Vodafone of the east” - which Fridman has dubbed his “Eurasia project.”

And Fridman's Alfa Group has no compunction about playing hardball in pursuit of its goals.

For example, Alfa Group is enveloped in another bitter fight with Norway's Telenor over the strategy and direction of VimpelCom and the leading Ukrainian mobile phone operator Kyivstar, in which they both own significant stakes.

At the end of May, the two sides called a truce with Telenor agreeing to VimpelCom's takeover of 100% of Kyivstar for $5 billion.

However, what swung the deal was Alfa Group's acquiescence to Telenor's demand for a market-based separation agreement that would leave only one of the two investors in VimpelCom if another fight broke out between them again - clearly Telenor is not comfortable being in bed with Alfa Group.

Alfa Group was back in the Swiss courts last October when the ICC banned the sale of Turkish cellular operator Turkcell to Alfa Group, after the now merged Scandinavian group TeliaSonera claimed to be the rightful owner of the stake. Alfa Group is certainly not scared of a fight, but Galmond was also up for one.

WHITE FLAGS AND FISH

After Rozhetskin's bombshell in the Marriott, Galmond says he wasn't going to give up without a fight. Several cases were started at once in the British Virgin Islands where the three Alfa Group subsidiaries that currently control the MegaFon stake are registered, even though the option agreements called for disputes to be settled by the ICC in Switzerland.

The two option agreements became the subject of two separate arbitration cases and while the case concerning the first agreement is still on going, the Geneva tribunal decided in August 2004 that the second option agreement was, “legal and IPOC had carried out its undertakings.”

It said Rozhetskin had "not come close”

to proving that the agreement was signed under duress (the onus of proof is on the accuser), that evidence before the tribunal “falls far short of establishing money laundering or any other impropriety” and that Alfa Group was a “non-bona fide” purchaser of the Megafon stake.

However, the tribunal said that while under English law the shares would be transferred back to Galmond, because the Alfa Group subsidiaries that bought LV Finance and other related holding companies were not party to the tribunal hearings, its decision was not binding on Alfa Group.

At this point Fridman attempted to call a truce. He invited Galmond to Osteria, a famous fish restaurant that was also popular with the Soviet nomenclature. Once there, Fridman led Galmond into the back and a private dining room.

“You won in Geneva, so maybe there is a way that we can find a way forward,” Fridman is alleged to have told Galmond over dinner.

Fridman suggested merging VimpelCom and Megafon, and told Galmond that he didn't need the Swedes or Norwegians for anything else. According to Galmond, Fridman floated the idea of sharing control of the board in a 50-50 split, but Alfa would keep 85% of the economic benefits of the merger.

He went on to talk for a long time about his plans for the Eurasian project, says Galmond, who listened but was unmoved.

“Look I can't discuss a settlement with a gun against my head,” he told Fridman.

“Give me back my shares. Let me go after Rozhetskin and if you didn't know about all these games [he played], then let's go out and announce that.”

Fridman sat back and said that his offer was the only way he could see to settle the differences between the two of them. Galmond was incensed as Fridman was intending to contribute the LV Finance stake in Megafon - in his eyes, his stake - to the merger between VimpelCom and Megafon.

SMEAR TACTICS

The gloves came off after the Osteria dinner.

A few days later Galmond found himself under investigation by the German authorities after the financial regulator BaFin received an official complaint about money laundering - from Alfa Bank.

A spokesman for Commerzbank said that between 1996 and 2002 the German bank held shares in First National Holding (FNH), which holds shares in IPOC. The account manager at Commerzbank was Michael North, who later quit and set up a company called Eurokapital - which received funds from companies belonging to IPOC and was connected to Reiman - and was appointed a director of IPOC in 2003.

Alfa complained to BaFin that Commerzbank was dealing with a money laundering operation, namely IPOC.

However, the Commerzbank spokesman says an internal enquiry was already carried out by the bank in 2003 and expects the BaFin investigation to be little more than a formality, as it is obliged to investigate all complaints.

News of a money laundering investigation at a venerable German bank caused a flurry, but it was just the beginning of a long campaign.

During the Russian Economic Forum in London in April of 2004, Peter Aven, Fridman's partner in the Alfa Group, drove across London from the Queen Elizabeth II Hall in the shadow of Westminster Abbey to the modern office block that stands in the shadow of St Paul's Cathedral where Kroll has its main European office. He was checking up on the private investigation firm's efforts to dig up dirt on Reiman.

Press room fax machines had begun spewing out material a few months before.

About the same time a former US Senator met Andrew Neil, editor of the British papers The Scotsman and The Business, and gave him a pack of documents that described in detail a network of companies in Germany, Bermuda and Cyprus that are controlled by Galmond and IPOC.

All the major papers were being sent copious amounts of material, which was followed up by a blizzard of calls from PR firms offering interviews with characters like Anthony Georgiou, a swashbuckling Italian businessman who arrived in Russia in 1979 on a contract to bring Moscow's Cosmos hotel up to international standards for the Moscow Olympics.

After standing in a queue in a hotel in St Petersburg for 10 hours to make an international telephone call, Georgiou decided to set up a telecoms company in St Petersburg and met Leonid Reiman and Valery Yashin, who at that time were both rising stars in local government.

Most newspapers were cautious about using material so obviously intended to stir up a hornet's nest, but the stories have been trickling out nevertheless because much of what was being dished up was so sexy - documentary evidence presented in court proceedings that strongly suggested Russia's telecoms minister was illicitly the beneficiary owner of Megafon.

The relentless pressure to find a link between IPOC and Reiman almost paid off when David Hauenstein, an IPOC director, said in an affidavit to the British Privy Council earlier this year that in the light of evidence presented to the Privy Council, IPOC's board has concluded, "that the point has come where it can no longer maintain that Mr Galmond is the sole beneficial owner of IPOC," although he stopped short of naming Reiman.

Georgiou testified on Alfa Group's behalf in the British Virgin Islands (after it had bought his Russian businesses). He accuses Reiman of accepting a $1 million payment to get the 16 ministerial signatures needed to get an operating licence for a new mobile company, PeterStar, and even offered a copy of the receipt signed by Reiman in evidence.

“It is a fact of life of doing business in Russia that it is necessary to take care of everyone whom you need help from. Mr Reiman seemed an expert in ‘oiling the wheels’ and had no compunction about doing it,” Georgiou said in his statement to the court.

Galmond claims the money was not a bribe, but part of a business deal and Reiman successfully sued a Russian newspaper for libel after it published a story last year saying the money was a bribe.

Galmond is sticking to his guns. He admits his company structure is opaque, but insists that “to be guilt of money laundering, you have to have done something illegal and we have done nothing like that.”

The money laundering charges are based on the web of companies connected to IPOC that are designed to avoid tax and hide the identities of the beneficial owners, which are identical to the murky structures that all of Russia's financial-industrial groups were using in the 1990s to whisk profits offshore during the worst of Russia's robber-baron capitalist era.

However, Galmond says this similarity is the point of these structures: there is nothing illegal in these schemes, which is why they were so popular with the financial-industrial groups - and why it was recommended to him by the nowdefunct accountancy firm Arthur Andersen.

“Our company structure is extremely tax efficient,” he says. Ultimately, Alfa Group may be winning the propaganda war, but all the legal decisions have gone IPOC's way.

“The ICC was in my favour; the Supreme Court appeal [in Switzerland on the ICC ruling] was in my favour; the money laundering allegations were thrown out by the BVI and we got an injunction over the shares,” says Galmond. “Stockholm says Fridman is an illegal entrant in the company, so tell me what has he won? Nothing. Just because the big boys on the beach throw sand in your eyes doesn't mean you have to walk away.”